It is not possible to be fully prescriptive about the required approach to the assessment of competitor prices because it depends so much on what is possible and what is cost effective, and this will depend very much on sector and country.
There are, however, some general principles which can be followed and these are offered as guidance for management judgement.
Business judgement
Pricing decision
Market positioning Strategic
objectives
Customer perceptions
Competitor offerings
Estimated cost Required
profitability
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Competitor definition
Competitors should be defined as widely as possible, including all possible alternative purchases available to customers. Coca-Cola would clearly regard Pepsi as its main competitor but its price comparison would be likely to include all drinks and food products that represent alternative purchases for customers.
In some markets this might mean tea and coffee, in other markets diluted soft drinks or ice cream.
However, there has to be a balance – too wide a comparison will make the analysis complex and potentially misleading; too narrow a comparison will miss out on vital information. The key principle is to think from a consumer perspective when deciding the competitor set against which to benchmark. What does the consumer view as the alternative choices?
The key test is: who loses when we win? If we sell another product, what is it replacing? It is important to avoid conventional definitions and industry classifications which encourage production-oriented thinking and a superficial definition of competition. An apparently similar product – for example a low price, low value soft drink sold in down-market retailers – may not be a relevant competitor to a company operating at the premium end because it is not an alternative purchase for the consumers being targeted. Such prices may still be quoted to provide different perspectives and reference points, but they should not be the main focus of the analysis.
Price definition
Prices should be defined as widely as possible. In the case of consumer goods manufacturers selling to retail outlets, this will mean coverage of prices to retail trade customers as well as to the ultimate consumer. This should confirm once again that comparisons can rarely be exact or easy. It is relatively straightforward for the brand manager to find out the price at which competitors’ chocolate bars are selling in Tesco or Walmart in particular areas. It will not be easy to find out the price at which Tesco and Walmart are buying from your competitors; that needs knowledge of discount and margin structures that will be individually determined and difficult to compare.
It is also likely that discount structures will make the comparisons complex to interpret. For instance, how do you treat cash discounts if they are linked to special payment terms that do not apply to your dealings with that customer? How can you find out about and take into account special retrospective rebates, granted on achievement of sales targets? Special deals will also cause difficulties when surveyed at the retail level – there will be problems of comparison because of promotions, special offers and extra value packs, which may be offered on a temporary basis and
Understanding the competition
which may differ between channels and regions. It is important that a comparative survey embraces these complexities rather than pretending they don’t exist, even if it makes the analysis of information and the judgement calls that much more difficult.
It is also important to compare like with like. If the directly comparable chocolate bar has a different weight by a factor of (say) 10 per cent, should the comparison be per bar or per unit of weight? There are never perfect answers to this kind of question, but the best guideline is to make the comparison in the same terms as the customer decision – if the customer makes the buying decision in terms of price per bar rather than price per gram, the results of the survey should be expressed in these terms too.
Coverage
A price survey should cover all segments in which you are competing, for instance different geographical areas, channels and classes of customer. Experienced managers in consumer goods companies often warn of the dangerous practice of wide ranging pricing judgements being made on the basis of a few isolated comparisons in the chief executive or marketing director’s local supermarkets, which have little validity elsewhere. Surveys must be as wide and statistically valid as possible if they are to be used for across-the-board pricing decisions.
One important principle to make comparisons and conclusions more meaningful is that the focus should be on relative as well as absolute prices. The analysis of the different segments is likely to be much more helpful if the results are expressed as a discount or a premium to a mean or median price, or in relation to particular competitors. However, it is important not to get too hooked onto just one competitor, perhaps the market leader, and forget the other competitors, direct and indirect, which might be alternative purchases in customers’ minds.
The need for a broad picture
In Dolan and Simon’s excellent book Power Pricing, they suggest four characteristics of what they call ‘power pricers’ – their label for those who adopt the proactive and value-based approach that we are advocating. One of these characteristics is the building up of ‘fact files’ to provide a comprehensive information base about each major competitor so that price comparisons are seen in the required broad context. These should include information about a competitor’s cost structure, financial performance, business history, capabilities, strategy and target-setting processes. The latter elements of this information may not be easy to obtain and may not be available in precise form, but their collection, analysis and subsequent discussion is critical to success.
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The term ‘fact file’ perhaps underplays the vital need for such information to be used interactively. All data on competitors, hard and soft, must become the driver of discussion and proactive decision making, rather than lying in its fact file, waiting for external events to drive the pricing decision. It is also important for the right person to have the responsibility for obtaining and maintaining this information, to avoid it becoming dated and sterile. Such a person must combine knowledge of all information sources, with the energy to be creative and proactive.
Information sources
Information which can be purchased from market research companies is likely to be the main source of price information in many consumer goods sectors and, where it is available on an ongoing basis at realistic cost, it is likely to be a good investment. Though it may be perceived that the value of such information is reduced because all competitors have access to it, this does not make it any less important to obtain. The critical point is that you will be at a disadvantage compared with competitors if you do not take it and use it.
There is more doubt as to whether it is cost effective to commission ‘ad hoc’ price research on an ongoing basis because this is often expensive, though it might sometimes be justified as a ‘one off’ survey linked to a particular strategic review.
If market research data is not available or proves not to be cost effective or reliable, there may be other good sources, particularly for general background information to supplement the price data. Trade associations, independent industry analysts, consultants and stockbroker analysts are useful sources to supplement the market research data and your internal efforts. These internal efforts will also be much more effective if you have someone with the necessary time and expertise to search the Internet on a regular basis in order to keep the fact files up to date.
One aspect to consider in the brief given to the person or department with responsibility for competitor information is the extent to which it should be actively and directly sought from the competitors themselves. Clearly there are tactics by which this can be obtained secretly, and these should be encouraged within legal and ethical limits, but an open and co-operative approach should also be considered.
It is often assumed that keeping competitors in the dark is always the right approach and that the best way to achieve competitive advantage is by unshared research. This may work well, particularly if your research resource is as good as, or better than, any in the market. However, you should remember our earlier point – that if every competitor in the market is in a state of ignorance, often encouraged by customers who want to play off one against the other, this may result in low pricing strategies, adding to pressures on margins and reduced overall profitability. If an industry co-operates in the sharing of price and general
Understanding the competition
business information, it may work in the interests of all competitors, though it is always important to be sceptical about the validity of information being submitted by less scrupulous operators.
Maximize sales force information – but beware
It is also important that the fact files should include sales force intelligence on a systematic basis. Clearly the prices seen by sales people as they visit channels and have conversations with customers can be a major source of price information.
There should be strong encouragement for such information to be sought proactively. Sometimes sales people do not know their competitors’ prices simply because they have never asked their customers and they should be encouraged to seek as much information as possible during every sales contact. It is particularly important to use information from loyal customers; if it is a long-term and trusting relationship, customers may be more willing to share information about competitors than is often believed.
However, it is important to be questioning and challenging about such information, particularly where business-to-business transactions are involved. The key reason for this need to challenge is that price is often the easy answer to the question, ‘why did we lose this business?’ It may be sincerely believed, but it may also be wrong. It is often the customer’s explanation when a contract is not secured because it is easier to blame price than to say, ‘we did not like you or your pitch’. Sales and marketing people, reluctant to shoulder the blame for the problem and face the more difficult issues, may willingly buy into this easy explanation. There is also an inevitably one- sided aspect to sales force information on price. Customers are likely to tell sales people when business is lost because prices are too high; however, they will not tell them when prices are too low and when the business could still have been gained at a higher price level.
Therefore, though it is vital to use sales force intelligence to gather data where it is not easily visible, the results should be interpreted with care. In particular, outdated, anecdotal information from a few individuals must not become the conventional wisdom that is never challenged or compared. The best way to avoid this is to keep the information fresh and to make sure that it is assessed and discussed before becoming the basis for action.
Cost effectiveness
Each organization has to make its own judgements about the cost effectiveness of pricing surveys and to decide when the value of extra, more detailed research ceases to make it worthwhile. Even in the most visible and standardized of industries, such judgements have to be made. Examples of extremes are useful to
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show the relative degrees of difficulty and the need for compromise at both ends of the spectrum.
At the ‘easy’ extreme are the retail supermarket operators which can carry out a price survey simply by sending someone to a competitor store with a notebook, or by buying off-the-shelf data from a market research agency. Contrast this situation with an example of the ‘difficult’ end – a management consulting company which, when trying to find out competitor prices, will be hampered by confidentiality, complexity and difficulties of comparison; for example, what level of consultant, what type of work, what unit of measurement? For the retailer the question is: to what level of detail does the research go? How many stores, over which period, how many product variants? For the management consultant the question may be: is it cost effective to carry out competitor price research at all?
Would we be better to concentrate on optimizing our value package and its appeal to customers, using customer reaction as the best gauge of competitor challenges?
In many cases the answer may have to be a reluctant ‘yes’.